It’s been a painful stretch for investors in the gold (GLD) trade, with the metal down over 15% since its Q3 2020 highs and continuing to make lower highs thus far this year. Adding insult to injury, many investors have watched the S&P-500 (SPY) march higher at a brisk pace, with the market averages outperforming gold by more than 3000 basis points in the past 12 months. The two pieces of good news despite the beating investors in the metal have taken are that the metal is so hated that sentiment has reached the despondence stage, and the technical picture remains intact despite another violent drop earlier this month. A sentiment backdrop that’s nearly as bearish as 2018 combined with a long-term uptrend is a great setup for the metal, contingent on the bulls’ ability to start playing offense soon. Let’s take a closer look below:
(Source: Daily Sentiment Index Data, Author’s Chart)
As shown in the chart above, gold is a very emotional trade, regularly swinging from extreme exuberance to complete despondency every 12-18 months. Over the past 12 years, gold has entered a state of despondency on eight different occasions, and with another down month so far in August, it’s looking like the metal could be on track to reach its ninth signal last this year. All of these signals have provided short-term buying opportunities and strong 6-month forward returns for the metal, with the three most recent signals marking major lows. These three dates were January 2016, January 2017, and August 2018. In January 2016 and January 2017, the signal was late by over three weeks, meaning investors had to front-run the signal to accumulate a position in the metal near the lows. In August 2018, the signal was a week early, allowing investors to double down at lower prices.
(Source: TC2000.com)
Given that the signal can be early, I prefer waiting for the signal to hit before getting aggressively positioned, and we have still yet to register a short-term buy signal based on this indicator as of this week. However, with this indicator rolling off the elevated readings from mid-June, this sentiment gauge is set to plunge closer to 20% bulls by early September. So, whether we see further weakness or not, the ingredients are in place for a potential buy signal or a near-buy signal within the next few weeks. Typically, this has led to a minimum of 15% upside over the following six months, and the lows being in within 5%. This suggests that the lows are likely in at $1,670/oz, assuming we get a short-term buy signal in Q3.
(Source: TC2000.com)
One point of contention from the bears is that this is the furthest thing from an uptrend in gold, with lower lows and lower highs over the past two months and over the past year. While this is true, shorter time frames are less useful when they’re in disagreement with the larger timeframes, and they often end up being noise within the bigger picture. If we look at the bigger picture, we’ve got a major level in play just below that continues to act as support, and this was previously a brick wall of resistance following the 2011 bull market peak.
Obviously, a failure to hold the $1,670/oz to $1,720/oz level would be a negative development. However, for the time being, buyers are stepping in immediately, and the bulls deserve the benefit of the doubt. The key to regaining control of momentum again, though, is to push past the multi-month downtrend line that’s now in place with a breakout above $1,875/oz.
(Source: TC2000.com)
So, what’s the best course of action?
With the gold price down nearly 20% from its highs and many investors having already given up on the sector, the sentiment backdrop is the best it’s been in years, which is precisely the time to buy commodities. This is similar to where we stood with oil last year when you couldn’t give away oil producers to most investors, nor ETFs that tracked the commodity. Currently, we are nearing a similar point on gold, and as long as $1,670/oz holds, I don’t see any reason to change the view that this is merely a cyclical bear market within a long-term bull market. Based on this, I continue to remain long GLD, and I may look to add to my favorite miners like Kirkland Lake Gold (KL) if the metal dips back below $1,765/oz.
Disclosure: I am long GLD, KL
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.